Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson. Photo / Getty Images
Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson. Photo / Getty Images
Opinion
OPINION:
What is happening to inflation? The Treasury says, while there will be a blip in prices, inflation will remain low. Yet business sees signs of inflation everywhere.
If we get inflation the economic and political effects will be devastating.
Who is right? Like many issues in economics, it's aquestion of time.
Long term, there are huge deflationary forces. There is Wright's Law that says as production increases, the labour cost falls. And as China has become the world's factory, the cost of manufactured goods continues to fall.
Meanwhile, the money printing - which is causing house price increases - is debt.
Debt is the transfer of future prosperity to today. This debt will dampen the economy and depress prices, but that is in the future.
Right now it would be a mistake to believe there is just a temporary transport bottleneck.
As long as there is little international travel there will be a shortage of airfreight capacity. The crisis in shipping is worse. Too many ships have been scrapped. It takes three years to build a container ship. The transport crisis will last for years.
If you can get space, container rates have increased on some New Zealand routes seven times. China to Europe has increased 10 times.
The shortages are across the supply chain. There is a waiting time for a new truck, even longer for trailers. Then there is a global shortage of drivers.
The knock-on effects are everywhere: Houses uncompleted because they cannot get lumber, plumping fitments, dishwashers, etc. Even if you can get supplies there is a shortage of construction workers.
In Rotorua last week there was no ink for my brand of printer. The control on my wall stove has broken. There are no parts. The technician could not even guess when the parts will arrive.
Prices have to rise. I need a printer for work and a stove for cooking. I will pay whatever it takes to have a home office and home cooking.
Thirty years of low inflation has made retailers reluctant to increase their prices. The return on assets has been falling as businesses have been absorbing price increases.
This is no blip. Price increases have to be passed on to the consumer.
Job ads reveal a record job shortage. In March 2019, the government issued 19,000 work visas, many to skilled workers. Last March there were 408 work visas and in April, just 319.
We are paying a huge price for the slow rollout of the vaccine. Ministers' latest excuse is that they did not know the government could pay extra for a faster rollout.
Wages have to rise and for some critical skills, significantly. Wage rises are not a blip. Once wages go up, they stay up.
Inflation is a psychological phenomenon. When we expect price rises we have inflation.
Meanwhile, the Reserve Bank continues recklessly printing billions of dollars. Our Finance Minister is spraying out stimulus on an economy with full employment.
Low value spending and money printing have to stop. The longer the Government waits, the worse the inflation will be. The Government has to find a way, maybe pre-travel vaccination, to solve the skill shortages.
Increased costs for retailers will have to be passed on to the consumer. Photo / 123RF
The cabinet does not understand economics but there is an inflation message in votes that they do understand.
Voters hate inflation. Wages never catch up to prices. Interest rate rises devastate households with mortgages. Voters punish governments that cannot guarantee the buying power of our money.
From 1972 to 1984 was politically the most volatile time in our history. For most of the 12 years inflation was in double figures.
Every Government lost the popular vote in the next election. If we had MMP New Zealand would have had five governments.
It did not matter how big the majority, 1972 and 1975 were record majorities, or how popular the Prime Minister. After the death of Norman Kirk in 1974, Robert Muldoon dominated the polls, yet like Jacinda Ardern, he only won the popular vote once.
The Labour caucus 1975-78 makes the present National caucus look dynamic. We Opposition MPs were astonished when we won the popular vote.
Judith Collins is feistier than Bill Rowling.
Oppositions do not win elections, Government's lose them. Nothing causes an election loss more certainly than our money losing value.
To slow the inflation that is coming, interest rates need to increase now.
Here is the real worry. If we measured the CPI the way we did in the 70s, inflation is already over the Reserve Bank's target. This government has broken every fiscal pledge.
Will these spinners just change the Reserve Bank's inflation target?
Then we will be past the point of no return.
- Richard Prebble is a former leader of the Act Party and former member of the Labour Party.
